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New York State businesses are about to be hit with a hefty tax, after the state borrowed more than $400 million from the federal government to pay unemployment benefits and failed to pay it back.

Businesses will be required to pay an extra $21 per employee by Jan. 31 under a mandatory federal assessment to make up the debt. That's on top of the $56 per worker they already pay in federal unemployment taxes for all of this year.

In all, the automatic Federal Unemployment Tax Act levy amounts to $150 million statewide. And it may continue or increase next year if the debt is not fully repaid. The loan was necessary to pay significant benefits after a surge in layoffs.

"That is typical. They default, we pay," said Kurt Amico, partner and co-owner of MidCity Office Equipment in Buffalo. "If I default on a loan, I still have to pay it."

"It's gotten unbelievable to do business in this state," said Steve Glamuzina, owner of Georgetown Square Wine and Liquors in Amherst, who has eight employees. "Every time you turn around, there's another tax that's coming along. Private business is not an endless well, and you just cannot continue to keep taxing and taxing."

Some large businesses and trade groups already are aware of the situation, but many smaller companies and accountants are not prepared. Notices will go out shortly.

"That's huge," said Dave Schlein, tax partner at Lumsden & McCormick, an accounting firm in Buffalo. "That's just ridiculous. It's a hidden tax."

"I've been fearing this," said Andrew Stettner, policy analyst at the National Employment Law Project, an advocacy group for the unemployed and working poor. "It's a pretty significant burden. I'm surprised by how little discussion there's been of how to pay off our current debt."

While the tax hike is not crippling, business groups say the situation is another example of how the state fails to create a business-friendly environment.

"It's unfortunate. It makes it hard to attract new business to the state," said Eric Oxfeld, president of UWC-Strategic Services on Unemployment and Workers' Compensation, a trade group of employers in Washington that lobbies on unemployment issues. "Come to New York and help pay a tax to repay a debt you had no role in helping to create."

The federal tax, known as FUTA, is not paid by individual employees but by their employer. It is paid by for-profit employers and home businesses, not by government agencies, nonprofits or Indian tribes. More than 7 million workers are covered, or 83 percent of the state's work force.

It is separate from the state unemployment tax.

The extra tax is not likely to hurt large companies, whose payrolls and finances are big enough to absorb the added cost. But it may have a greater impact on small businesses, whose profit margins are often already slim.

For Advanced Facilities Services of Cheektowaga, the tax means the cleaning and maintenance company will end up paying about $3,500 extra for its employees, all because "the government doesn't manage their business properly," said chief executive Brian Brault.

"That's a little frustrating to find out about this now. I would much rather take that money and put it back into my employees and help them to better afford their living," said Brault.

Adding insult to injury for some, the state and New York business leaders made a conscious decision to allow the deadline to pass. State officials say they tried to work with business leaders for two years to solve the benefits shortfall that resulted from the national recession and especially the 2001 terrorist attacks.

"Our primary concerns have always been to address the shortfall in a fiscally responsible manner, while mitigating the impact on employers," said state Labor Department spokesman Robert M. Lillpopp. "This disaster put a greater stress on the system than could ever have been anticipated."

But in an unusual twist, it was state business leaders who effectively dictated the current path, Lillpopp said. They refused to support any options besides the FUTA levy or issuing a bond on the open market, he said.

Employers pay taxes every quarter to both the state and federal government to pay for unemployment benefits for laid-off workers.

Federal law lets states borrow from the U.S. Treasury if they have a shortfall in their unemployment benefits money. Texas, Illinois, Minnesota, North Carolina, Missouri and New York received such loans recently.

However, the law also requires the states to bring their programs back into the black as soon as possible and to repay any debt within two years. If they don't, the law authorizes the government to recoup its money by increasing their actual federal tax rate by 0.3 percent. And the rate continues to go up by that amount every year until the debt is gone.

The state borrowed $188.8 million in March 2002 to pay benefits but repaid it within a month. That's because the U.S. Labor Department distributed excess money to the states, including $491 million to New York. However, New York soon racked up more debt because it still lacked a cushion to cover rising unemployment benefits.

Currently, the state owes more than $570 million. It has been paying interest on the loan, but the principal is due Wednesday. At that point, the tax rate goes up, retroactive to the beginning of the 2004. That means the $150 million surcharge for all of this year will be due in one lump sum, along with employers' regular fourth-quarter tax. The special payment would double for 2005 and triple for 2006, until the debt is gone.

Yet the Business Council opposes what experts such as Oxfeld and Stettner recommend: creating a larger reserve as many other states have done. Stettner said New York had too small a cushion in 2000 because of tax cuts in the 1990s.

"New York state was ill-prepared for the recession. If the state had been better prepared, it wouldn't be in a situation of having to take loans in the first place," Stettner said.

Lillpopp said the state Labor Department has drafted legislation to strengthen the state's unemployment benefits system so it can withstand "unforeseen events," but he declined to elaborate. The legislation has not yet been introduced.


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